Notes and ideas on mass customization, personalization, customer co-creation, and open innovation -- strategies of value co-creation between organizations and customers. This blog continues a long running newsletter, published and edited by Frank Piller, RWTH / MIT, since 1997.

August 23, 2005

I have written several times in this newsletter on connecting mass customization with open or user innovation, i.e. to integrate customers in the innovation process by the means of co-design toolkits. The scholar who has founded this field is Professor Eric von Hippel, Head of the Technological Innovation and Entrepreneurship Group at the MIT Sloan School of Management. I am privileged to work with him here at MIT in the moment.

[Update: As this posting gets plenty of traffic, I have updated this post with the full interview -- the link to the external EURAM site where it had been placed does not work any longer.]

For the occasion of a keynote at the EURAM 2005 conference, where Eric delivered the opening keynote, he shared some thoughts on “democratizing innovation” in this interview. Democratizing Innovation is also the title of his new book (The MIT Press, ISBN 0-262-002744.). The book is available for download from MITPress.com and his website under a Creative Commons license.

The following interview provides a good summary of his thoughts and why this all is important.

Q: Professor von Hippel, what do you mean when you say innovation is becoming democratized?

A: I mean that product and service users – both individuals and firms - are increasingly able to innovate for themselves. Open source software has brought this phenomenon to general academic attention. However, I and my colleagues find that innovation is actually being democratized quite broadly: this is the case for physical products as well as information products like software. I think that this trend is a “good thing.” It seems to me that user-centered innovation processes offer great advantages over the manufacturer-centric innovation development systems that have been the mainstay of commerce for hundreds of years. Users that innovate can develop exactly what they want, rather than relying on manufacturers to act as their (often very imperfect) agents. Moreover, individual users do not have to develop everything they need on their own: they can benefit from innovations developed by others and freely shared within user communities.

Q: Why is user innovation growing?

A: Users develop products for themselves when they cannot find what they want on the market. Available data indicates that user need is highly heterogeneous – many users have “custom” needs. Advances in computing and communication technologies are enabling users with custom needs to design and build what they want for themselves at steadily lower prices. This leads to increasing levels of innovation by users. Indeed, levels of user innovation appear to be remarkably high. Empirical research conducted by Luthje, Franke and Shah and others finds that from 10% to nearly 40% of sampled users engage in developing or modifying products in various fields.

Q: Why does innovation by users matter?

A: Innovation by users matters for two major reasons. First, users that innovate – both individual consumers and user firms - have been found to be “lead users.” That is, relative to other users in their populations they are ahead of the majority with respect to an important marketplace trend and expect to gain relatively high benefits from a solution to their leading-edge needs. The correlations found between innovation by users and these lead user characteristics are highly significant, and the effect sizes found are also very large. This means that the innovations users develop for themselves will be of interest to many users. Second, it has been found that users that innovate often freely reveal what they have developed. This means that other users – and manufacturers – are able to imitate what lead users have developed. The net result is that manufacturers often do produce innovations pioneered by lead users. Indeed, these innovations are a major feedstock for the new products that manufacturers produce and sell to the general marketplace.

Q: You also say that user-centered innovation can “out-compete” manufacturer-centered innovation under some conditions. Can you give us an example?

A: The innovation history of kite surfing is a nice example. Kite surfing is a water sport in which the user stands on a special board somewhat like a surfboard, and is pulled along by holding onto a large, steerable kite. Users were the initial developers of kitesurfing equipment and techniques, and then manufacturers came in as the market grew. By 2003 the market for commercially-produced kitesurfing equipment exceeded $100 million annually, and several manufacturers had entered the business of designing and manufacturing kites for commercial sale.

In about 2001, Saul Griffith, a MIT PhD student with a long-time interest in kite surfing and kite development, decided that kite surfing would benefit from better on-line community interaction. Accordingly, he created an Internet site for the world-wide community of user-innovators in kite surfing. Griffith began by posting patterns for kites he had designed on the site and added helpful hints and tools for kite construction and use. Other user innovators joined in and posted improved designs. Some also posted sophisticated design tools such as aerodynamics modeling software and rapid prototyping software. Many site participants turned out to have top-level technical skills – for example, one was a skilled aerodynamicist employed by an aerospace firm.

The scale and quality of the collective user effort grew to exceed that of equipment manufacturers. Indeed, some designs posted on the site for free downloading were clearly better than the designs developed by manufacturers. As a result, some manufacturers began to shift to downloading and building user designs rather than designing their own. In other words, free user-developed designs began to drive out manufacturer-based development activities. Of course, one can see the same phenomenon in industries that are economically more important – although perhaps less fun to talk about. For example, many manufacturers in the custom integrated circuit industry have become “silicon foundries” that specialize in produce user-designed circuits. Billions of dollars of these are produced each year.

Q: So, do manufacturers like user innovation?

A: Not all of them! The ongoing shift of product development activities from manufacturers to users is painful and difficult for many manufacturers. Open and distributed innovation is "attacking" a major structure of the traditional division of labor. Many firms and industries must make fundamental changes to long-held business models in order to adapt.

Q: These fundamental changes seem to imply also changes for governments and legislation.

A: Yes. Together with Joachim Henkel I have explored the social welfare implications of user innovation. We found that, compared to a world in which only manufacturers innovate, social welfare is very probably increased by the presence of freely-revealed innovation by users. This finding implies that policymaking should support user innovation, or at least should insure that legislation and regulations do not favor manufacturers at the expense of user-innovators. Governmental policy and legislation have long contained the assumption that manufacturers are the developers of new products and services. As a result, innovation-related government incentives have sometimes been directed preferentially to them. Social welfare considerations suggest that this must change. Especially, the workings of the intellectual property system are of special concern. But, despite the difficulties, it seems to me that the goal of a democratized user-centric innovation system appears well worth striving for!